Industrial Sector Update 11/19/2015

"A New Solution in E-Commerce"

In response to decreasing vacancy rates in the industrial real estate sector, e-commerce retailers have had to alter their approach to distribution to better meet the demand of customers for greater quantities and quicker delivery. As demand for improved and expanded infrastructure remains sustainably high for e-retailers, industrial space is being absorbed at a faster rate than it is being constructed, leading to more strategic approaches to warehouse operations. Increased online purchasing, and its consequent need for higher production, has predominantly fueled this trend. It has also been driven by the goal of achieving same-day delivery, which arose when retailers began trying to compete with Amazon’s quick production and delivery. Without the capital to match Amazon’s infrastructure, retailers have resorted to breaking industrial operations into two key strategies: “first mile” distribution, which relates to large-scale operations and large warehouses in primary markets, and “last mile” distribution, which relates to smaller-scale warehouses with close proximity to urban centers. More specifically, first mile distribution for e-commerce firms has led to the norm of large distribution centers, designed for advanced technology and future expansion. Last mile distribution, on the other hand, has moved distribution outside of these large warehouses into smaller ones that can reach farther locations faster, leading to faster delivery. Last mile distribution, however, is also less efficient, because of factors that are difficult to overcome, especially for companies without a lot of pre-established infrastructure, such as traffic, low-load factories, and end high courier costs.

"The Sale/Leaseback Trend Breaks Into Medical Real Estate"

The practice of sale/leaseback — in which a real estate asset is sold then leased back from the buyer, done primarily to untie the cash invested in the property — has been a growing trend among large retailers and restaurant chains, and is becoming increasingly prevalent in healthcare. Many firms are employing the practice to take advantage of high property values, despite the fact that it can lead to high expenses from the lease in the long term. Sears, for instance, sold 235 properties for $2.7 billion last month, and plans to lease back most of them. The trend has begun to impact smaller assets, particularly healthcare facilities and medical offices, which have seen a decreasing vacancy rate as a result of favorable demographics in the medical care industry, such as an aging population that demands more healthcare. When the landlord and tenant come to an agreement, the landlord essentially buys the practice that inhabits the building, and this has led to an important note on valuation: the value of the property is increased a great deal because the lease is agreed upon by the present tenant. The recent flow of cash into the medical sector has driven property prices up, raising the sale price of a sale/leaseback transaction. Medical offices in general tend to be considered recession-resistant, due to the relatively constant demand for medical care, and most facilities are considered low-risk because they are anchored by medical practices. Conversely, leases can negatively impact operating margins by introducing rent expenses, which prevents hospitals from selling and leasing back; but the sale/leaseback trend is still expected to continue as healthcare real estate sees new highs.